There were significant changes in the Budget on the 30th October 2024 that will have a major impact on Estate Planning in the future. This note is not intended to be all embracing but seeks to address the concerns of our typical clients.
By Michael Brooke FCA TEP
The major changes announced concern the inheritance tax treatment of pensions, an effective rate of 20% on qualifying unquoted shares and the severe reductions in business property relief and agricultural relief. These combine to turn current estate planning on its head. There are also major changes to the taxation of Trusts and the treatment of Non Doms.
Taking each in turn:
- Unsurprisingly the IHT exemption for pensions has been removed with effect from 6/4/2027 rendering pensions ineffective in IHT planning. Whereas before the advice was not to draw your pension but live off capital liable to IHT the new advice is likely to be to draw your pension otherwise your estate could be liable to 40% IHT on the value and your beneficiaries will be liable to income tax at their marginal rate (up to 45%). Pensions can be transferred to spouses free of tax.
- Qualifying unquoted shares including AIM shares will only qualify for 50% relief from 5/4/26 and thus an effective rate of 20%. This does not eat into the £1m BPR limit. This may still be palatable as it is not 40%!
- Also, from 5/4/26, it is only the first £1m of combined agricultural and business property relief which will qualify for 100% relief from IHT. Above £1m the relief reduces to 50%, an effective rate of 20%. Lifetime gifts pre 30 October 2024 which subsequently fail on death in 7 years will also not be affected by the new £1m limit rules
- Trusts will receive a combined £1million allowance. However, where a settlor has settled multiple trusts before 30 October 2024, each of those trusts will have its own £1million allowance.
- The UK will move to a residence-based system from 6 April 2025 that will see IHT being charged on worldwide assets for individuals who have been UK resident in ten out of the last twenty tax years. Such individuals will remain within the scope of IHT for up to ten years following exit from the UK, and the IHT ‘tail’ will depend on how long they were resident in the UK.
There is, however, good news in so far as what was not done!
- There are no changes to the rules on gifting, either out of income or as a potentially exempt transfer. The 7 year rule with potential tapering remains and giving away one’s wealth remains an important part of estate planning.
- Even better is that the uplift in the capital gains base cost at death remains. This means if you do not sell your unquoted shares in your lifetime the maximum tax could be 20%. Compare this with selling in your lifetime and a capital gains tax rate of between 10% and 24% plus IHT of 40% on the cash proceeds you were not able to give away and survive 7 years.
- Good news also that the nil rate band and residents nil rate band are unaffected even if the thresholds remain unchanged to April 2030. This means that each person can have up to £500,000 free from IHT.
The Chancellor is expecting to raise £40bn through these measures and one has to hope she does so there is less justification in future years for further increases. One has to be hopeful! There is, though, a significant risk that the good news above will be closed down over the coming months and years. There may have been a political judgement that we can only take so much bad news in one budget.
The points above are only a brief synopsis of the major Estate Planning points arising from the budget. There are many other aspects to consider in Estate Planning and any one concerned is welcome to discuss with me in Abingdon or Philip Kinzett-Evans in Newbury and Rebecca Horne-Smith for Hungerford and Swindon.
